Trade Costs and Endogenous Product Di¤erentiation for International Firms

We study the impact of trade liberalization on the international strategy of rms (to export and/or invest abroad as well as the number of varieties to be produced) when product di¤erentiation is endogenous. By considering product di¤erentiation as a strategic variable, our analysis sheds new light on the impact of trade barriers on the decision to produce abroad and on the choice of product range, in accordance with recent empirical evidence. We show, even though technology exhibits the same productivity for each variety, rms drop some of varieties with trade integration. In addition, our results reveal that, contrary to the standard theoretical literature, the relationship between the decision to export and trade costs is non-linear. When trade costs are relatively high, \u85 rms may export and be multi-product. Finally, the choice of producing abroad results from either a prisoners dilemma game or a chicken game